The coalition government will on Thursday announce plans to axe its sustainability watchdog in order to meet targets for public sector spending cuts, it emerged today.

Proponents of the Sustainable Development Commission (SDC) argue that its remit to advise government on reducing its carbon emissions and other resource use saves far more money that it costs.

The plan to scrap the Sustainable Development Commission is – ironically – scheduled to be unveiled on the same day that the agency will release its annual report into green improvements to the government's operations. This lists tens of millions of pounds worth of savings from fuel costs, water, waste and other things. Many of the changes were prompted by advice from the SDC which has staff of around 60 and a budget of just under £3m, and which was set up by the then deputy prime minister John Prescott in June 2000 after persuasion from Michael Meacher MP.

The move will be seen by many environmentalists as directly counter to David Cameron's pledge to lead the "greenest government ever". When meeting civil servants a week after the election he said, "There is a fourth minister in this department [energy and climate change] who cares passionately about this agenda and that is me, the prime minister, right. I mean that from the bottom of my heart."

Tonight Caroline Lucas MP, the head of the Green party, called the move an "absolute disaster". "The Sustainable Development Commission has been a vital source of well-informed scrutiny of government policy. The commission has come out with very sensible proposals."

"If the current government is to really stand a chance of getting its head round sustainability, the urgency of the threats, and the huge opportunities to benefit this country's economy as well as its people through green policies, we need the Sustainable Development Commission and we need it to have a strong and independent voice." She said she had tabled a parliamentary question asking the government assess the SDC's value to date.

The decision to scrap the commission, which is jointly owned by the UK government and the devolved administrations, is likely to raise tensions between the Welsh assembly and Whitehall after the assembly's business minister Jane Hutt said she was "concerned" about the government's review of arms length bodies and added "we will make representations [to the UK government]". Speaking to the assembly, she praised the SDC for playing "an important part" in the assembly's plans to move Wales to a zero-carbon economy.

Her answer was prompted by a question last week from Plaid Cymru's sustainability spokesperson Leanne Wood AM.

Wood told the Guardian: "The Sustainable Development Commission was set up to advise government how to cut carbon emissions. To scrap this body now would suggest that the Conservatives are lukewarm when it comes to tackle climate change." She added that Plaid Cymru wanted the SDC to be retained in Wales.

The Department for Environment, Food and Rural Affairs refused to confirm or deny whether the SDC would be cut. But a spokesperson said: "'In line with the coalition government's commitments, Defra is examining its large network of arms-length bodies ... No final decision has been made on other arms-length bodies and we are continuing to talk with them and with unions to ensure that essential policy and delivery areas are managed in the most efficient and cost-effective ways. Announcements on other arms-length bodies will be made in due course once this process has been completed."

On Wednesday, former energy and climate change secretary Ed Miliband said: "The coalition has made some terrible decisions on the environment - scrapping the loan to Sheffield Forgemasters, shelving Labour's plan for the Green Investment Bank. They promised to be the greenest government ever but they're completely betraying that promise."

Will Day, the SDC's chairman, said: "Sustainable development is no peripheral, nice-to-have concept for prosperous times. It is the best way of delivering more for less, while ensuring that the drive for efficiencies doesn't cost more in the long run."

The SDC began as a tiny £350,000-a-year operation with a unique license to be a "critical friend" to the government, which could provoke and cajole ministers and civil servants into greener actions. Its first chair was the environmentalist Jonathan Porritt, the former director of Friends of the Earth. Porritt stepped down last year to make way for the current head Will Day. The SDC's current role involves independent advice to the prime minister, as well as the devolved administrations. Its brief is, through advocacy, advice and appraisal, to raise sustainability at the heart of government.